Stopping Iran Peacefully

Iran's nuclear program continues to progress unabated and analysts are becoming increasingly concerned about the limited options available to peacefully halt Iran's pursuit. Despite this pessimism, options still remain. In today's Wall Street Journal, Orde F. Kittrie, a senior fellow at the Foundation for Defense of Democracies (the same policy institute that I work out of), argues that "Tehran has an economic Achilles' heel -- its extraordinarily heavy dependence on imported gasoline. This dependence could be used by the United States to peacefully create decisive leverage over the Islamic Republic."

Indeed, Iran's dependence on imported gasoline is quite astonishing. Despite being an oil rich nation, Iran lacks the refining capacity to meet its demand for gasoline. Thus, it imports approximately 40% of its gasoline needs, some at above market price. The cost, combined with the price subsidies offered on gasoline domestically (the current price is 11 cents a liter), is enormous and eats up a significant chunk of Iran's oil revenues - an important factor in Iran's current fiscal crisis.

But it is also a major strategic vulnerability. As Kittrie writes:

In recent months, Iran has, according to the respected trade publication International Oil Daily and other sources including the U.S. government, purchased nearly all of this gasoline from just five companies, four of them European: the Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries. If these companies stopped supplying Iran, the Iranians could replace only some of what they needed from other suppliers -- and at a significantly higher price. Neither Russia nor China could serve as alternative suppliers. Both are themselves also heavily dependent on imports of the type of gasoline Iran needs.
Were these companies to stop supplying gasoline to Iran, the world-wide price of oil would be unaffected -- the companies would simply sell to other buyers. But the impact on Iran would be substantial.

The idea of trying to halt oil exports to Iran has strong bipartisan support in Washington. Both President-elect Obama and Senator John McCain indicated their support for the policy during speeches at the AIPAC policy conference this past June. Mr. Obama went so far as to discuss it during the second presidential debate:

[I]f we can impose the kinds of sanctions that, say, for example, Iran right now imports gasoline, even though it's an oil-producer, because its oil infrastructure has broken down, if we can prevent them from importing the gasoline that they need and the refined petroleum products, that starts changing their cost-benefit analysis. That starts putting the squeeze on them.

The U.S. House of Representatives also included similar language in the 2007 Iran Counter-Proliferation Act.

While there seems to be support behind the policy, few have laid down ideas as to how to achieve the stated objective. Kittrie provides a few:

Consider India's Reliance Industries which, according to International Oil Daily, "reemerged as a major supplier of gasoline to Iran" in July after taking a break for several months. It "delivered three cargoes of gasoline totaling around 100,000 tons to Iran's Mideast Gulf port of Bandar Abbas from its giant Jamnagar refinery in India's western province of Gujarat." Reliance reportedly "entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery." One hundred thousand tons represents some 10% of Iran's total monthly gasoline needs.

The Jamnagar refinery is heavily supported by U.S. taxpayer dollars. In May 2007, the U.S. Export-Import Bank, a government agency that assists in financing the export of U.S. goods and services, announced a $500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, 2008, Ex-Im announced a new $400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery.

Or consider the Swiss firm Vitol. According to International Oil Daily, Vitol "over the past few years has accounted for around 60% of the gasoline shipped to Iran." Vitol is currently building a $100 million terminal in Port Canaveral, Florida.

Last year, when Minnesota Gov. Tim Pawlenty discovered that an Indian company, Essar, was seeking to both invest some $1.6 billion in Minnesota and invest over $5 billion in building a refinery in Iran, he put Essar to a choice. Mr. Pawlenty threatened to block state infrastructure subsidies and perhaps even construction permits for the Minnesota purchase unless Essar withdrew from the Iranian investment. Essar promptly withdrew from the Iranian investment.

Florida officials could consider taking a similar stance with Vitol.

Clearly, this is just a start. But if the policy can succeed, Iran might finally feel the pressure that economic sanctions have aspired, but failed, to produce.